Modified-Mortgage Defaults Soar 24% in Looming Housing Challenge

Nov. 19 (Bloomberg) -- New delinquencies on reworked
mortgages held by bonds without government backing jumped in
September, a sign that some of the fuel for housing’s recovery
isn’t sustainable, according to JPMorgan Chase & Co.

A record of more than 28,000 modified home loans within so-called non-agency securities turned delinquent, a rise of 24
percent from the prior month, JPMorgan analysts said in a Nov.
16 report. The share of all non-agency loans between 30 and 60
days past due soared 0.44 percentage point to 3.54 percent, the
highest since February 2010, data compiled by Bloomberg show.

Aggressive modification activity has partly driven the
sharp decrease in the housing market’s “shadow inventory” tied
to bad loans, the analysts led by John Sim wrote. While
individual homeowners with reworked mortgages are performing
better, an increase in the total number who’ve gotten aid means
they represent a threat to rising property prices.

“We are now seeing a wave of re-defaults from the
modifications over the last two years that failed,” the
JPMorgan analysts said. “This wave should last through 2013.”

Shadow inventory in the U.S. fell to 2.3 million homes as
of July, down 10.2 percent from a year earlier, according to a
report last month from CoreLogic Inc. The firm’s tally includes
seriously delinquent loans, homes in foreclosure and bank-owned
properties that haven’t been listed.

After a 35 percent drop from a July 2006 peak, home prices
in 20 large metropolitan areas gained 8.8 percent from February
through August, according to an S&P/Case-Shiller index. Sales of
previously owned properties climbed 2.1 percent in October to a
4.79 million annual rate, exceeding economists’ forecasts,
figures from the National Association of Realtors showed today.

Seasonal Trends

Seasonal trends and fewer business days on which borrowers
could make payments at least partly explain the September surge
in early delinquencies among non-agency loans, analysts at
financial institutions including Credit Suisse Group AG and
Amherst Securities Group LP said in reports. The data were
released mostly on Oct. 25.

A jump in first-time delinquencies seemed largely contained
to loans serviced by Bank of America Corp., according to the
analysts from Amherst, and those at JPMorgan, who wrote that
“it may be possible there were reporting lags or other
operational problems” that “artificially” boosted the
lender’s figures.

While modified loans are increasingly important to non-agency investors, there’s “significant uncertainty” about
their future performance “given the lack of historical
precedent for the current situation,” Nomura Securities
International analysts including Paul Nikodem wrote in a Nov. 16
report.

Subprime Loans

About 35 percent of outstanding securitized subprime loans
have been modified and more than 25 percent of so-called option
adjustable-rate mortgages, according to the report. About $216
billion of securitized non-agency mortgages are being paid on
time after previous delinquencies, Amherst data show.

Recidivism rates after 12 months for modified subprime
mortgages have declined to about 40 percent from almost 80
percent for loans reworked in the third quarter of 2008,
reflecting loan servicers offering larger payment reductions and
more cuts to balances, according to the Nomura analysts.

Fannie Mae and Freddie Mac’s burgeoning holdings of
modified mortgages, which drove non-performing loans at the
government-supported companies to a record last quarter, also
cast “doubts on the true health of the housing recovery,” Jim
Vogel, an FTN Financial analyst, wrote in a Nov. 16 report.

‘Thorny Issues’

The firms owned $195 billion of restructured loans on which
they were accruing interest as of Sept. 30, according to the
report. The debt is also on the “list of thorny issues” that
must be addressed before the companies can be replaced, he said.

Values of securities in the almost $1 trillion non-agency
market are little changed this month even after the release of
the delinquency data and amid slumps in assets including stocks
and high-yield company bonds.

Typical prices for the senior-most bonds backed by option
ARMs were unchanged last week at 62.8 cents on the dollar, up
from 51 cents at the start of 2012, Barclays Plc data show.
Option ARMs can allow borrowers to pay less than the interest
owed by increasing their balances.